Assume that you are an investment analyst preparing an analysis of

an investment opportunity for a client. Your client is considering the acquisition of

an apartment complex from a developer at the point in time when the apartments

are ready for first occupancy. You have developed the following information.

1) Number of units = 40

2) First year market rent per unit = $430 per month

3) Rent is projected to increase by 8% each year

4) Annual vacancy rate = 3% of PGI

5) Annual collection loss = 2% of PGI

6) Annual operating expense = 35% of EGI

7) Miscellaneous yearly income (parking and washers/dryers) = $800

8) Annual miscellaneous income is expected to remain constant

9) Purchase price = $2,000,000

10) Estimated value of land = $600,000

11) Anticipated mortgage terms:

a) Loan to value ratio = .80

b) Interest rate = 6%

c) Years to maturity = 25

d) Points charged = 3

e) Prepayment penalty = 2% of outstanding balance

f) Level payment, fully amortized

g) Fixed interest rate, monthly payments

12) Anticipated holding period = 4 years

13) Proportion by which property is expected to appreciate during the holding

period -- 5.5% a year

14) Estimated selling expenses as proportion of future sales price = 5%

15) Marginal income tax rate for the client = 28%

16) It is assumed that the property is put into service on January 1st and sold on

December 31st

17) Assume the client is "active" in the property management

18) It is assumed that the client has an adjusted gross income of $95,000 and

has no other passive income not offset by other passive losses (for each year

of the anticipated holding period)

19) Client's minimum required after tax rate of return on equity = 12.5%

Calculate:

a. The before-tax and after-tax cash flows for each year of the holding period

and the before-tax and after-tax equity reversion.